Incarceration risk, asset pricing, and black‐white wealth inequality

Introduction Historically, black Americans have been disproportionately at the bottom quantiles of the wealth distribution. As the choice of making any investment that can increase future wealth requires equating an asset's price to its return adjusted by a stochastic discount factor, this article considers if black‐white differences in the risk of incarceration, which can reduce the intertemporal marginal rate of substitution in consumption, matters for black‐white differences in wealth. Methods With repeated cross‐section data from the U.S. General Social Survey, we estimate the parameters of ordinal regression treatment specifications of individual wealth levels to measure the effects of incarceration risk on wealth. Results Parameter estimates reveal that individual wealth levels vary inversely with incarceration risk. As black Americans have relatively higher incarceration risks, this suggests that at least part of the black‐white wealth gap can be explained by racial differences in incarceration risk. Conclusion Criminal justice reforms that reduce black‐white disparities in incarceration rates could also reduce black‐white disparities in wealth.